Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 18 August 2006

Simply put, procurement outsourcing to a Procurement Services Provider (PSP) is the transfer of specified activities relating to sourcing and supplier management to a third party.

Why should you consider procurement outsourcing?

It is a well known fact that businesses that outsource (well) grow faster, larger, and more profitably then those who do not. When done right, this is especially true for procurement as it can generate additional value through sourcing and compliance savings as compared to the savings opportunities from most outsourcing arrangements, which are generally limited to efficiency improvements and headcount reductions. In addition, it is a transformational type of outsourcing where a portion of the savings generated from an initial endeavor can be used to finance and expand the transformation.

One reason to outsource would be if the procurement of certain categories, such as indirect or non-critical materials, or the management of certain procurement processes, such as requisitioning and compliance tracking, were not core competencies since outsourcing provides an opportunity to increase efficiency, lower costs, and increase savings. Outsourcing in these situations is often much more economical than trying to build the competence internally.

Another reason to outsource is to keep your top performers happy. A first class sourcing professional wants to focus on strategic core purchases where she can have the greatest impact, not tactical indirect categories where savings opportunities are limited and impact minimal. By transferring manual and tactical tasks and low-impact indirect categories and class-C commodities, you give your top performers more time to focus on what they do best and what benefits you the most. On the flipside, your low-volume non-strategic indirect categories become high-volume strategic niche categories in the hands of a PSP who can aggregate volume across clients to the point where niche professionals focused on that category can be hired and kept happy by the sheer volume of opportunities.

A final reason to outsource would be if procurement is an area that, if managed properly, could drive significant value to your business but it is not an area you plan on investing significantly in or increasing focus internally. In this case, you could consider full spend management outsourcing, but it is not something we would recommend unless you were in an industry where all goods and services procured on a regular basis were non-strategic indirect or commodities. A hotel chain would be one example of a firm where full spend management outsourcing might make sense as the vast majority of goods and services procured on a regular basis are commodities.

How does procurement outsourcing work?

There are essentially three basic levels to the outsourcing of procurement functions: infrastructure transfer, tactical process transfer, and strategic category transfer.

At a basic level, you are moving or augmenting staff, technology, systems, and supplier management to or with the PSP. At the next level, you are moving certain processes, such as requisitioning or procure-to-pay, that are easily automated and tactically oriented. At the highest level, you are transferring responsibility for entire categories and expecting the PSP to undertake strategic sourcing initiatives with respect to those categories.

At a basic level, the PSP will manage e-Procurement systems that automate and streamline manual purchasing processes and transactions and provide you with improved spend visibility, compliance, and process efficiencies. At a higher level, where you transfer tactical processes and control of indirect or commodity categories, the PSP will support day-to-day activities in supplier management, order and pricing compliance management, and policy enforcement and provide you with improved services levels and reduced costs. At the highest level, where you transfer strategic categories or full spend management, the PSP will provide on-going end-to-end strategic management of these categories, implement strategic sourcing best-practices, and drive continuous process improvements that should eventually lead to significant cost savings, or cost avoidance if raw material prices are steadily increasing in your commodity categories.

What results can you expect to see?

The value associated with procurement outsourcing is extensive. In addition to the year-on-year cost savings documented by numerous studies, obtained by way of the PSPs in-depth market knowledge and volume aggregation capability, you maximize your return on your existing procurement capability by freeing up your professionals to focus on your most strategic categories. You reduce cycle times and increase the capabilities available to your users, but, most importantly, you provide your users with total indirect spend visibility as a PSP will be able to benchmark practices and prices and apply a standardized process to each category it manages.

In their 2004 Benchmark Study that surveyed 750 senior procurement, supply chain, and CFO professionals, Aberdeen found that enterprises outsourcing procurement recognized rapid and measurable reductions in cost structures, improved spend leverage and control, and operational efficiencies. In particular, they found that, even in the early stages of procurement outsourcing, on average, companies could reduce prices paid for goods and services by 18%, improve contract compliance by 60%, halve sourcing and transaction cycles, reduce administration and automation costs by over 25%, and improve rebate and volume discount capture by up to 20%.

Aberdeen also found that 43% of enterprises already outsourced select procurement processes or spend categories and that an additional 15% planned to outsource procurement functions by 2007.

For more information on procurement outsourcing, see the “Procurement Outsourcing: A Brief Introduction” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 13 August 2006

Friday we introduced you to the concept of center-led procurement, where a procurement center of excellence (COE) centrally creates and coordinates strategic purchasing decisions across the enterprise and yesterday we discussed the role of the procurement COE and some of the challenges in its initial creation. Today we discuss some best practices for getting the most out of your procurement COE.

(1) A Chief Purchasing Officer (CPO) or Chief Supply Chain Officer (CSCO) on the executive team leads the COE

This insures that plans, and initiatives, are aligned with the business, diverts resistance, and helps bring each of the different business units on board quickly.

(2) Cross Functional Teams

This insures that the right knowledge is in place to make the best decisions from a strategic and best practices viewpoint.

(3) Multi-Year Supply Plans

This promotes better alignment and integration with your strategic supply chain design and helps establish the center as a strategic leader in key commodity categories.

(4) Coordinated Metrics and Incentives

Each unit needs to have their performance analyzed off of the same metrics, linked to actual value creation, and the incentives of each unit need to be tied to these metrics. Everyone wins or no one wins. This insures that procurement, as the biggest potential contributor to cost savings, maintains a central role in the organization and that everyone sticks to the mutually agreed upon strategies and policies.

(5) Web-Based Automation and Decision Support Tools

They allow you to accelerate the transition to the center led model and extend sourcing activities to the desktop of every stakeholder in your organization while enforcing corporate policies and processes.

(6) Ongoing Education

Keep up to date on the latest trends and success stories and share best practices and methodologies with each unit of the organization on a regular basis.

(7) Speak to the supplier community with a central voice

This helps you fully leverage your spend opportunities and facilitates shared process improvements. Furthermore, this will help you select and integrate a key group of suppliers into the product design and specification process. Strong supplier management will allow you take full advantage of supplier performance and this will lead to better quality, faster product introduction, shorter cycle times, and more value from the relationship.

For more information on center led procurement, see the “Center Led Purchasing: The Procurement Organization of Tomorrow” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 12 August 2006

Yesterday we introduced you to the center-led procurement organization that blends key category spend leverage, process standardization, and knowledge sharing of centralized organizations with the empowerment, execution, and fast reaction times of decentralized organizations that are able to take greater advantage of their local markets and resources on which they are more knowledgeable. Tomorrow we will discuss some of the best practices of center led organizations but today we will describe the role of a procurement center of excellence and some of the challenges in its initial formation.

The role of a sourcing professional in a center of excellence (COE) following the center-led model of procurement is a challenging one. You must develop commodity strategies and sourcing policies that leverage the expertise and best practices of the enterprise and guide all buys for each affected category and, when appropriate, negotiate master contracts without specifying the individual buys or pull patterns of each of the business units. You must define, identify, and oversee the implementation of technology solutions that enable the automation of tactical aspects of purchasing at all levels of the organization without infringing on existing IT systems or processes or complicating the lives of the purchasing professionals in the individual business units. You must educate the organization on the importance of not only common processes, but of maintaining complete, consistent, and up-to-date quality data on which real-time reports can be generated that will allow you to measure savings, compliance, performance and detect any significant deviations that might need to be dealt with at the unit level or the center level.

The transition to a center led model will be full of challenges, but given that center-led companies typically report 5% to 20% cost savings for each new dollar of spend brought under management, it will be worth it.

Most of the challenges fall into the usual people, process, and technology triumvirate, with the measurement challenge encompassing all three.

The people challenge is significant. The first thing you have to do is identify the right people with the right skill sets to lead the organization and the category teams that the COE will need to create. Combined, this team will need to have engineering, finance, management, and leadership skills in addition to traditional purchasing skills. Furthermore, the leader, which should be a CPO (or CSCO), should have enough experience to bring it all together. You may not be able to locate the necessary talent internally and may need to recruit in an increasingly tight skills market.

Then your core team needs to build cross-functional category teams that include key representatives from all major geographies, business units, and key suppliers with whom you have strategic relationships. They have to teach these teams to speak a common language and work together as a cohesive whole.

The process challenge is significant as well. You are switching from a single operational model of purchasing to a framework that supports multiple models, depending on the best strategy for the category or specific commodity. Some commodities will be leveraged and negotiated across the enterprise in a centralized model, some commodities will be negotiated centrally but sourced locally in a mixed model, and some commodities will be sourced locally in a decentralized model, all depending on what the center of excellence decides is the best approach for that commodity. For example, a food service chain might source condiments globally, meat regionally but with local exceptions (as per health regulations), and building maintenance locally.

The technology challenge is simultaneously easy and daunting. You know you need to automate routine transactions and processes to allow you to focus more on strategy, analysis, and managing exceptions but the sheer number of technology providers and solutions can be daunting. Furthermore, you have to work closely with your IT department to reach a seamless and fully integrated source-to-settle infrastructure that fully mirrors the best practices that you have defined. However, the effort is more then compensated by the reward. According to the recent Aberdeen report, more than 80% of the Fortune 1000 companies that have adopted web-based sourcing and requisitioning tools have reported double digit cost savings, enhanced process standardization and knowledge sharing, and dramatic improvements in compliance and process efficiencies.

For more information on center led procurement, see the “Center Led Purchasing: The Procurement Organization of Tomorrow” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 11 August 2006

One of the hot topics in sourcing today is the trend toward center-led procurement organizations where strategic decisions are coordinated centrally while transactional activities are decentralized across the organization, especially in large enterprises (>1B).

Today we are going to compare and contrast center led procurement with the traditional centralized and de-centralized models of procurement and overview some of the advantages of the center-led model. Tomorrow we will delve in to the role of a sourcing professional in a procurement center of excellence and overview some of the challenges you and your company will face in shifting to a center led model. We will wrap up on Sunday with an overview of some best practices and strategic focal points that will help you get the most out of a center led organization.

A classic decentralized model of procurement, where each business, functional, or geographic unit is responsible for its own purchases, has a number of advantages. It empowers individual business units with autonomy and control over their process and design decisions and improves their overall satisfaction. It speeds process and issue resolution and allows your organization to take advantage of expertise in the local market. However, it has a number of significant disadvantages. It does not allow you to leverage your corporate spend or align the business unit objectives with the objectives of your organization. There is little coordination or information sharing between divisions, best practices are not shared, and supply costs and performance are uneven across the enterprise. Furthermore, your operating costs are often quite high.

A newer, centralized model of procurement, where all procurement goes through a single, central organization, has many advantages. First of all, unlike the decentralized model, it allows you to fully leverage your corporate spend across the enterprise and drive standardized sourcing processes through the organization. The inherent economies of scale allow you to wield the full power of your spend, enhance operational efficiencies, and improve knowledge sharing and best practice execution. However, it too has disadvantages. You lose the extensive knowledge of the individual local supply markets and consumption patterns of the decentralized structure, which often results in sub-optimal buys for many regions. The risk of maverick buying increases when your geographically dispersed site managers do not agree with centrally mandated decisions and this impacts local supply, quality, or reaction times. Forcing centralized buys of commodity or service categories not suited for centralized buying can actually increase cost or service quality. Reaction times to unexpected changes in supply or demand suffer, which is critical if your profit margins depend on demand-driven supply strategies.

However, a center-led model of procurement, where a procurement center of excellence (COE) focuses on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing while leaving individual buys and tactical execution to the individual business units gives you the best of both worlds – all of the advantages of the centralized and decentralized models with minimal disadvantages.

The center led model, built on cross-functional teams that represent all of the key divisions and business units, allows for the creation of flexible supply chain processes and commodity strategies that can be tailored at the local level when necessary to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories well suited for centralized sourcing and non-strategic categories not suited to centralized sourcing can be handled by the individual business units. You increase operational efficiencies and decrease overall operational costs while maintaining the ability to react quickly to unexpected changes in supply or demand. Best practices can be shared easily throughout the enterprise, maverick buying significantly reduced, and performance maintained at a consistent level.

Furthermore, a recent study from Aberdeen Group demonstrated that organizations with center led procurement considerably outperform their non-center led counterparts in both spend under management and supply cost reductions achieved. Center led companies reported more than twice as much spend under management than companies with a decentralized structure and nearly 20% more spend under management than companies with a centralized structure. Moreover, center-led companies report 5% to 20% cost savings for each new dollar of spend brought under management. That’s probably why more then 75% of companies surveyed expect to have either completed, or started a transition to, a center led procurement organization by 2008. However, with that volume of savings, why wait?

For more information on center led procurement, see the “Center Led Purchasing: The Procurement Organization of Tomorrow” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 30 July 2006

Friday we introduced you to supplier performance management and yesterday we discussed some of the challenges in developing and implementing a supplier management program. Today we will discuss some best practices and steps to success.

Many of the eight best practices that we discuss below grow out of the C5 (connect, coordinate, check, control, and cultivate) Aberdeen operational supplier management framework, as discussed in Aberdeen Group’s recent “Supplier Performance Measurement” Benchmark Report.

The first best practice is open communication and data sharing between parties to make sure that everyone is on the same page.

The second best practice is strategic supplier selection (often known as supplier rationalization) for strategic engagements. This generally means concentrating purchases with a small set of suppliers to provide the buyer with greater leverage and fewer suppliers to proactively manage in performance and quality improvement initiatives. This does not mean single sourcing, as that is wrought with risk.

The third best practice is the definition of mutually agreed upon performance targets and mutually agreed upon metrics. Create joint action plans with your suppliers to meet these targets.

The fourth best practice is continual scorecarding to insure that the metrics are continuously up to date. Scorecarding should be done at least monthly, data tracked at a granular level by location, trade lane and product family, and linked to customer facing metrics. Linking primary KPIs across processes helps supply managers understand how their metrics link up with those of their customer facing peers.

The fifth best practice is proactive monitoring of the supply chain on a regular basis. This is usually done by way of business process management (BPM) technology that can alert stakeholders to exceptional conditions, assign accountability, track resolution progress, and automatically update affected systems.

The sixth best practice is the implementation of cross-functional problem resolution consistent with overall business objectives. Considering that there is a huge opportunity cost associated with human productivity losses from resolving supplier performance problems, it is vital that problems are resolved quickly and correctly. Leading companies use pre-programmed rule-management systems to guide them through intelligent resolution strategies. These systems are updated regularly with best practices.

The seventh best practice is the implementation of control points at suppliers to minimize mistakes. Utilize technology to check that items and quantities on supplier’s shipping documents on open order lines reflect those on the most up-to-date purchase order.

The eighth best practice is the use of predictive analytics and KPIs to transform supplier scorecards into forward looking risk management instruments to identify potential problems well before they materialize. Best in class firms scorecard, but leading firms are now using predictive analytics to spot inflection points and KPI correlations that identify potential capacity issues, lead time variability, quality, or supplier financial issues before they show up as a metric on a scorecard.

In Aberdeen’s “Supplier Performance Measurement Benchmark Report”, they identified Steps to Success for laggards, average performers, and best-in-class enterprises alike. These steps were thought out, generally applicable and on-target so we will repeat them as-is and refer the reader to Aberdeen’s report for additional insights.

Laggard Steps to Success:

1. Measure supplier performance constantly, and at least monthly. This is one of our eight best practices and key to continued success.
2. Improve visibility into supplier activity and inbound shipments. This will insure that your data is not only up to date but reliable.
3. Measure the downstream impact of supply disruptions. This will help you create actionable contingency plans that will minimize the cost of such disruptions when they can not be avoided.
4. Create a cross-functional review team. A key to sourcing success in general, it is especially true in supply risk management and supplier performance management.

Industry Norm Steps to Success:

1. Transform procurement and material managers into supply base developers. This is the essence of strategic sourcing best practices and improves your supplier performance management efforts across the board.
2. Implement supply chain management technology and manage supply disruptions based on business goals. This is another one of our best practices and ensures that downtime and costs associated with a disruption are kept to a minimum.
3. Insert control points at suppliers. Yet another one of our best practices, this helps catch potential mistakes that could be costly before they happen and streamlines operations.
4. Make scorecarding more granular. Good scorecards are granular scorecards and allow you to quickly zoom in on the root cause of a problem.

Best in Class Next Steps:

1. Apply statistical process control techniques. Take your processes up a notch with statistical control theory.
2. Adopt business process management technology. A best practice that allows you to catch exceptions as soon as the relevant data enters your system and stop small problems before they blossom into large problems.
3. Evolve your scorecard into a forward-looking risk management instrument. A best practice which helps you predict potential supply chain problems and take corrective action before your monitoring systems even notice a blip is the ultimate evolution of supply performance management.

For everyone:

1. Ask an expert. As the great Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.” The best learn from the best. Look externally for best-in-class providers to help you become best-in-class in supplier performance management.

For more information on supplier performance management, see the “Supplier Performance Management: Measure, Analyze and Manage Suppliers in a Supply Organization” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].